Excess liquidity

VIRTUAL REALITY

- TONY LOPEZ

Christmas Day 2024 was rainy. It was a fitting symbolism.

Bankers and economists have a unique concept called excess liquidity. And excess liquidity or excess cash leads to inflation – and corruption. So much cash chasing so few goods causes inflation. So much money without a justifiable spending plan leads to corruption.

Inflation was the highest in 14 years in 2023, thanks to high food prices and extreme weather. Inflation, or the rate of increase in consumer prices, averaged 6 percent in 2023, which eclipsed the previous 14-year high of 5.8 percent in 2022.

To control inflation, the Bangko Sentral ng Pilipinas raised interest rates. To discourage people from borrowing for consumption of goods. To encourage them to park their money in banks with higher rates for their excess cash.

Hence, the benchmark 91-day Treasury bill rate rose to 5.40 percent average in 2023 and 5.41 percent in January-October 2024. The 5.41 percent is 4.87 times the cost of money of 1.11 percent in 2021, the last full year of the Duterte administration.

BSP’s vicious rate increases appear to have worked. Inflation went down to 3.3 percent in January-October 2024, almost half the 6.4 percent inflation in January-October 2023.

The BSP’s reverse repurchase (RRP) rate more than tripled, in one year, from 2 percent in April 2022 (2 percent was in effect since November 2020, or for 17 months), to 6.25 percent in April 2023 and further up, to 6.50 percent in October 2023, before settling at 6.0 percent by November 2024.